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The Fed’s Folly: Is The Growth Bubble Bursting?

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The Federal Reserve has punished savers for years by keeping interest rates artificially low. And now the Fed is starting to punish everyone as artificially low rates are increasing inflationary pressure and decreasing buying power. And as the Fed increases rates, growth will slow (it’s harder to fund growth when borrowing costs go up) and the market will be in an uphill battle for years.

Whether you agree or disagree with the Fed’s monetary policies (or our interpretation there of), all you can do as an investor is play the cards you’re dealt, and hope the next bubble isn’t too much worse than the last one (for example, for how many more years can FANG-ish growth and momentum stocks keep outperforming value. In the meantime, here is our market sector and style heatmap (to give you an idea of where the action been most concentrated), as well as few ideas on how to play our current market conditions.

 

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Consumer Staples: You’ll notice in the table above, Consumer Staples (a traditionally conservative sector) has held up well during the recent sell-off. This is one of the reasons we like to main exposure to this low-beta sector within our Blue Harbinger investment portfolios—because when the market sell-off, Consumer Staples generally sell-off less. For example, we own a sizeable position in Consumer Staples company Proctor & Gamble, which was up 11.4% last week. Not only does P&G offer a steady stock price (because it’s business is so steady), but it also pays a healthy dividend (+3.3% yield). Last week, P&G announced earnings that were slightly above expectations, that was enough to drive the shares considerably higher. P&G is a dividend “Dog of the Dow,” and the shares have more steady long-term upside in the years (decades?) ahead. We might see a little sell-off in the shares next week as profit takers take profits after the big gain, but in the long-term P&G is a very healthy blue chip.

Somewhat similarly, Johnson & Johnson (JNJ) is a healthy blue chip healthcare company with a powerful consume (staples) segment. We recently wrote about J&J here: A Blue Chip Among Blue Chips.

On the flip-side, consumer discretionary and small cap stocks are sectors that tend to be more volatile, and not surprisingly—they’ve both sold-off hard recently, as shown in our table above. Additionally, many aggressive growth FANG-ish growth and momentum stocks have been selling off hard this month. This is not surprising, considering they’d been performing so extremely well this year, and were arguably due for a bit of a pullback.

As an investor, you may be wondering if this pullback is a buying opportunity or if it’s an indication that it’s time to take cover and head for the hills. Our answer to this question is two-fold. First…

Even the best economist in the world is still only right 50% of the time. Which means no one knows where the market is headed tomorrow or next week (no one!). However, unlike trying to predict where the market goes from here; you’re odds as an investor are much higher in picking individual stocks. But before you get into picking individual stocks, you must consider our other (second) point.

Know your goals and invest appropriately. If you’re 22 years old socking money away for retirement, you’re likely able to handle a little more short-term volatility in exchange for powerful long-term growth and compounding. On the other hand, if you’re already retired, and you count on your investments to generate income to cover your spending costs, then you’ll likely not want to be swinging for the fences at this point. A more conservative investment approach, such as blue chip consumer staples that pay growing dividends and offer share price appreciation to fight inflation might be considerably more appropriate for you.

Conclusion:

Once you’ve determined your goals, only then can you start picking individual securities to meet your needs. We have no idea where the market is headed tomorrow or next week, and quite frankly—neither does the best economist in the world. We could string together a pretty good narrative about how the Fed has created a huge bubble in growth stocks with their dovish pro-growth monetary policies of the last nine years, but even if that is true, we still don’t know if or when that bubble will burst (or if this month’s sell-off is the start of that bubble bursting—it’s probably not). However, picking individual securities is by far a more fruitful initiative than trying predict macroeconomic changes.

We’ve constructed our investment portfolios to meet the needs of investors ranging from long-term capital appreciation (Blue Harbinger Disciplined Growth) to higher income (Blue Harbinger Income Equity). Our goal is to help you identify exceptional investment opportunities as you manage your own investment portfolio. You can view more of our latest investment ideas here and here, and you can view our current portfolio holdings here.

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